Providence to move $4.3 million in pension funds to hedge fund with lower fees, higher return

PROVIDENCE — The Providence Board of Investment Commissioners, which is chaired by Mayor Angel Taveras, voted Tuesday to relocate $4.3 million in pension investments from a hedge fund with high fees to...

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By
ALISHA A. PINA
Posted Nov. 5, 2013 @ 9:49 pm

PROVIDENCE — The Providence Board of Investment Commissioners, which is chaired by Mayor Angel Taveras, voted Tuesday to relocate $4.3 million in pension investments from a hedge fund with high fees to another with significantly lower fees and a greater rate of return.

The change, says the mayor and now gubernatorial candidate, will help Providence to continue to “outperform” its peers and the state.

The investment of public pension money in hedge funds has come under close scrutiny in recent months, following the 2011 decision by the State Investment Commission, at the urging of General Treasurer Gina M. Raimondo, to invest about $1 billion of the state’s $7-billion pension portfolio — roughly 14 percent — in a variety of hedge funds.

Such funds are intended to offset potential losses in economic downturns. But critics say they’re risky and secretive and have overly high fees, typically 2 percent of the investment for management and 20 percent of profits.

The debate over the risks of hedge funds continues to grow as the race for governor shapes up.

Taveras, who is expected to face Raimondo in a Democratic primary, is shifting Providence’s pension fund away from hedge funds. Earlier this year, 20 percent of its assets were in hedge funds. Now about 13.8 percent, or $41.4 million, of the city’s $300.8-million fund are in hedge funds.

In the fiscal year that ended June 30, the city earned a return of 13.4 percent. Brown University’s endowment fund earned 12.6 percent, and the state earned 11.1 percent.

“I know that we have consistently outperformed our peers, even before I was mayor,” Taveras said. Speaking about Tuesday’s decision, he said: “This is not moving out of hedge funds, but lowering our fees drastically.”

The board Tuesday moved $4.3 million from a Graham Global hedge fund to a Renaissance hedge fund that already had $26.5 million of city assets.

Graham Global had a year-to-date rate of return of 2.5 percent on the city’s pension money, and its management and performance fees are 3 percent and 25 percent, respectively. Renaissance had a 16.5 percent rate of return and its management and performance fees are 0.5 percent and 10 percent, respectively.

Wainwright’s chairman and chief executive officer, Eric P. Bertonazzi, told the board that Renaissance’s hedge fund fee rates are lower because it was originally designed for large institutions making big investments. He said Graham Global charges its rates because it feels the return warrants it and the market can handle the rates.

The board unanimously voted to accept the first of Wainwright’s two recommendations — the second would have relocated $2.3 million of the $4.3 million to Renaissance and the remaining amounts ($1 million each) to two new non-hedge funds.

“It would seem to me option one makes sense, and it doesn’t change the city’s strategy,” Taveras said prior to the vote.

Said board member and City Councilman John Igliozzi, “I have a lot of faith in their recommendation.”

On Twitter: @AlishaPina

(Correction: The original version of this story incorrectly reported when the State Investment Commission began investing in hedge funds and what the state pension plan earned last year. The hedge fund investments began in 2011; the state's plan earned 11.1 percent in the year that ended June 30.)